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Nikkei Markets

After tough year, Olam banks on high-growth businesses

Net profit plunges as prices for many products decline

Over the next six years Olam plans to invest some $3.5 billion in businesses with high growth potential, including nuts, grains, cocoa and coffee.   © Reuters

SINGAPORE (Nikkei Markets) -- Olam International has ceased peanut farming in Argentina, exiting an area where it was once a major player, but the Singapore-based agricultural commodities company plans to continue investing in its edible nuts operation, which its CEO described as a "crown jewel."

Olam last month said it was embarking on a six-year strategic plan investing some $3.5 billion in businesses with high growth potential such as nuts, grains, cocoa and coffee, while getting out of others, including sugar, rubber and wood products.

Besides edible nuts, the company, whose biggest shareholder is Singapore state investor Temasek Holdings, is also a major player in the cocoa business. Its operations span more than 60 countries.

"Our 2018 performance has been below our expectations amid tougher than anticipated market conditions, particularly in the second half of the year," co-founder and group CEO Sunny Verghese said after the company reported a fourth-quarter net profit of 75.3 million Singapore dollars ($55.8 million), a 71.6% drop year on the year. The main factors were a lack of one-time gains as well as weakness in its peanuts, coffee, rice and dairy businesses. Net profit for the full year slumped 40.1%.

At the briefing, Verghese said Olam intends to grow its downstream peanut shelling and ingredients manufacturing business as well as strengthen its position in other edible nuts such as almonds, cashews and pistachios.

"The edible nuts business, like the cocoa business, is one of our crown jewels," he said.

He added that Olam decided to exit peanut farming in Argentina because of peculiarities that made it harder for companies to plan.

For example, leases for farm land in Argentina have to be renegotiated every one or two years, leading to fluctuations in the cost of producing peanuts.

"All of peanut growing in Argentina is rain-fed, not irrigated, so we are exposed to higher agriculture risk if there is a drought or weather-related rainfall issue," he said.

Verghese said Olam hopes to produce more almonds in the U.S. to complement Australia. The Singapore company also plans to make a big push in the ingredients business to capitalize on the growing demand for almond products.

As for cashews, where Olam is already the world's biggest supplier, the company intends to expand its processing footprint in Africa and grow its sourcing and origination business. Olam last year acquired a 30% stake in Vietnam's second-largest cashew processor as part of a plan to meet increased demand in Asia.

For the whole of 2018, Olam saw revenues from its edible nuts and spices operations fall 4%, mainly due to lower prices for many products.

Revenue in the confectionery and beverage ingredients segment fell 12.4%, hurt by historically low prices for coffee. Verghese said margins in the coffee business would remain under pressure in the first half of this year but should ease over the longer term as prices have fallen below production costs for many growers.

By contrast, its food staples and packaged foods business, the largest in revenue terms, saw sales rise 48.5% last year mainly due to higher trading volumes in grains.

--Kevin Lim

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